In June, online fashion retailer Missguided was heavily criticised for advertising a bikini that cost just £1. The swimsuit quickly sold out, but critics online and in newspapers questioned how the group could afford to sell it so cheaply without making use of unsustainable or unethical business practices. Missguided responded by saying it had cost more than £1 to make the bikini, but it had absorbed the costs “as a gift to our customers”, adding “it is sourced to the same high standards as all of our other products”.
Missguided is signed up to labour market initiatives such as the Ethical Trading Initiative and Supplier Ethical Data Exchange. But the House of Commons Environmental Audit Committee listed the company – among others – as “less engaged” in a report looking at consumption and sustainability in the fashion industry (published in February 2019, and excerpted below).
That said, it would not be fair to single out Missguided for criticism. The entire fashion industry – and ‘fast fashion’ companies in particular – are under increasing pressure from customers and investors to improve their standards when it comes to environmental, social and governance (ESG) standards.
According to a 2017 report from the Ellen MacArthur Foundation, a charity that campaigns to promote reduction of waste in the economy, textiles production creates more greenhouse gas emissions annually than all international flights and maritime shipping combined. Certain dyeing processes are among the biggest polluters of clean water. There are also concerns around the potential for unsafe working conditions, child labour and infringement of workers’ rights.
New products and collections are also being launched with far more frequency. Research from the World Resources Institute said fashion has moved from the traditional two cycles per year – Autumn/Winter and Spring/Summer – to as many as 100 “microseasons”. As a consequence, the average consumer bought 60 per cent more clothing in 2014 than in 2000, but kept each item for half as long. These buying patterns can lead to far higher levels of waste.
Investors cannot afford to ignore such concerns. Fast fashion companies have been stock market darlings in recent years. Asos (ASC) saw its share price climb from just 24p in 2001 to highs above 7,500p in March last year. Even at its current level of 2,600p, the shares have increased more than 100-fold. Boohoo (BOO) listed at 50p back in 2014, but trades at four times that price today.
ESG is getting harder to ignore
As the importance of sustainability issues rises across the investment world in general, and fashion in particular, it has become more important for companies to take action. Indeed, research from fashion industry magazine Drapers earlier this year showed 92.2 per cent of industry respondents said customers were showing a growing interest in sustainability, and that there was a commercial imperative to become more sustainable.
The Drapers report also offered an insight into why standards are not higher – 62.5 per cent said the main barrier to sustainability was the increased cost it entailed. A further third said leadership teams were not willing to take the hit to margins.
For some companies, ESG factors are central to their strategy. Patagonia has made its longstanding commitment to ethics and the environment a key part of its branding. Go to the group’s European website, for example, and documentaries about river protection or campaigns to protect wild fish feature more prominently than its products. By doing so, the brand has been able to “mine a rich vein of shifting consumer sentiment”, said David Sheasby, head of stewardship at investment manager Martin Currie, adding it “built an incredibly strong brand allegiance” as a result.
Given the self-expressive nature of fashion, companies in the sector arguably have more to gain by aligning themselves – and by extension their customers – with certain causes. This is not without risk, of course, as can be seen in the backlash against Nike among many US conservatives, following its decision to sponsor NFL athlete-cum-activist Colin Kaepernick.
It's in the details
Perhaps the biggest source of risk for investors is the supply chain of these companies, as information on employment practices can be difficult to come by. One of the starkest examples of this was the tragedy at Rana Plaza factory complex in Bangladesh in April 2013. Workers reported seeing cracks in their factory’s support walls, but were ordered back to work. The next day it collapsed, killing 1,134 people and injuring a further 2,500. The factory was working on orders for big European and North American clients such as The Children’s Place and Benetton. According to a report from the International Labor Rights Forum, many multinationals have policies in place that require suppliers to meet labour standards, but largely rely on outsourced companies to monitor compliance. The report argues “corporate-led models based on social auditing have served primarily to protect corporate interests and image, rather than provide a counterbalance to the unequal power relations that are at the root of poor working conditions and labour violations in garment factories across the world”.
Vaidehee Sachdev, senior research officer at shareholder activism charity ShareAction, said the lack of information on supply chains made it impossible to know what risks investors were facing. Investors’ first port of call should be the annual report, she added. It should be taken for granted that listed fashion companies will include some information about their policies to protect workers and the environment, but Ms Sachdev said it was important to check the claims against news coverage of its operations, to try to ascertain how much is simply spin. ShareAction is part of the Workforce Disclosure Initiative, which aims to improve transparency on companies’ operations and supply chains.
Euan Ker, sustainable investment analyst at Kames Capital, echoed Ms Sachdev’s point about the importance of understanding the supply chain. It is important to ensure that the company in question does not outsource its auditing and inspection process. One thing to look out for is membership of initiatives such as the Better Cotton Initiative – which ensures cotton production is sustainable and farmers are treated fairly – or the Fashion Industry Charter for Climate Action. Under the Bangladesh Accord, which was created in the wake of the Rana Plaza collapse, companies agree to fund and implement a joint fire, electrical and structural safety inspection programme. UK companies such as Marks & Spencer (MKS), Next (NXT) and N Brown (BWNG) are signatories.
Such initiatives can be a good way for retail investors to quickly get an idea of whether a group’s ESG policies are up to scratch. Many services offer ESG ratings for companies, but Sachdev warned their screening can be “very high level”.
Questions of sustainability are expected to become more central as time goes on, driven by pressure from customers and investors. Andrew Morgan, head of sustainability at Coats Group, the industrial thread manufacturer, said there had been a “step change” in the past year, with investors growing increasingly proactive when it comes to assessing companies’ ESG credentials.
Mr Morgan said ESG is to an extent a “hygiene element”, in that people want it to be covered – “but they’re looking for quality and service if they’re a customer, or returns if they’re an investor”. And he doesn’t think it will stop there. Mr Morgan added that he thought companies would increasingly be spurned if they were unable to meet ESG standards.